Merged Currency

Merged Currencies

A merged currency is a common currency shared with one or more nations. It has some of the advantages and disadvantages of a fixed exchange rate system:

Exchange rate certainty

A merged currency provides exchange rate certainty.
There is no foreign exchange risk between the countries in the merged currency and this certainty can help to encourage trade.

Loose monetary policy as a tool

A disadvantage of a merged currency is that each nation loses the ability to use monetary policy to change their economic outlook.
E.g France cannot lower interest rates to increase aggregate demand (AD) and stimulate demand in expansionary monetary policy because the European Central Bank controls the Euro interest rate.

Regional differences

European Central Bank (ECB) determines monetary policy for the euro and has representatives from all nations.
But the ECB's decision on rates will not always line up with what is best for the economy of an individual country within it.
- Greece may have high inflation and need higher interest rates and France may have low inflation and need lower interest rates, but the ECB cannot do both.

Political risk

Fixing a currency at a 'low' rate to make sure that exports are competitive could cause conflict with trade partners who find themselves to be uncompetitive.
The US is currently trying to address it's perceived trade imbalance with China, caused in part by the Yuan being kept weak by China buying US dollars.
Although the US and China aren't in a merged currency, this could happen between countries in Europe.

Advantages of a Currency Union

A currency union involves two or more countries sharing the same currency. A prominent example of this is the Eurozone (within the EU). Some advantages of a currency union are:

Trade stability

There will be an improvement in the stability of trade between member countries of the union.
This is because prices won't be affected by changes (or fluctuations) in the exchange rate.

Increased investment in other nations

Nations can be more certain about investing in other countries in the currency union because their investments will not be exposed to FX risk.

Lower transaction costs

Transaction costs can often reduce welfare.
In a currency union, transaction costs for imports and exports are likely to be lower as there is no need to change currency.
Although businesses like TransferWise and Revolut have reduced international transaction costs in some markets.

Encourages fiscal responsibility

To join the Eurozone currency union, governments must meet criteria with their fiscal policy.
Countries like Greece did not maintain discipline and had very large fiscal deficits after adopting the Euro.

Disadvantages of a Currency Union

A currency union involves two or more countries sharing the same currency. A prominent example of this is the Eurozone (within the EU). Some disadvantages of a currency union are:

Lose monetary policy as a tool

The currency union takes control of the monetary policy for the union as a whole. So individual countries lose autonomy.
The central bank will choose policies which should benefit the union as a whole but that could reduce a country's ability to respond to shocks in their own economy.
If unemployment is 30% in Greece, but 2% in France and Germany, the European Central Bank is unlikely to cut interest rates (use expansionary monetary policy) to reduce unemployment in Greece because it may lead to excess inflation in France and Germany.

Different economic make-up

If the countries’ economies are too different, then the appropriate value of their currency may be different from that of the union as a whole. This could slow down that country’s growth and harm other objectives.
If the Euro is valued too highly, nations like Greece and Portugal may find that their exports are uncompetitive.

Entry costs

There can be initial costs in joining a currency union to prepare firms and households for the change.
This may be through tighter monetary or fiscal policy in the build-up to joining.

1Microeconomics

1.1Competitive Markets: Demand & Suply

1.1.1Markets & Demand

1.1.2Diminishing Marginal Returns

1.1.3Supply

1.1.4Market Equilibrium

1.1.5Price Mechanism

1.1.6Consumer & Producer Surplus

1.1.7IB Multiple Choice - Demand

1.1.8IB Multiple Choice - Supply

1.2Elasticity

1.2.1Elasticities of Demand

1.2.2Factors Affecting Price Elasticity of Demand

1.2.3Elasticity of Supply

1.2.4Price Elasticity of Supply

1.2.5IB Multiple Choice - Price Elasticity of Demand

1.2.6IB Multiple Choice - Price Elasticity of Supply

1.2.7IB Multiple Choice - Other Elasticities

1.3Government Intervention

1.3.1Indirect Taxes & Subsidies

1.3.2Application Question - Taxing Prices or Quantities

1.3.3Subsidies & Price Controls

1.3.4Deadweight Loss & Government Intervention

1.3.5Elasticity & Tax Incidence

1.3.6IB Multiple Choice - Government Intervention

1.4Market Failure

1.4.1Types of Market Failure

1.4.2Introduction to Externalities

1.4.3Negative Externalities

1.4.4Policy for Negative Externalities

1.4.5Positive Externalities

1.4.6The Deadweight Welfare Loss of Externalities

1.4.7Case Study - The Externalities of Education

1.4.8Public Goods & the Free-Rider Problem

1.4.9Asymmetric Information

1.4.10End of Topic Test - Market Failure

1.4.11Application Questions - Market Failure

1.5HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2Macroeconomics

2.1The Level of Overall Economic Activity

2.1.1The Circular Flow of Income

2.1.2Defining GDP

2.1.3Limitations of GDP

2.1.4IB Multiple Choice - Economic Indicators

2.1.5Business Cycles

2.1.6Output Gaps

2.2Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve

2.2.2Components of Aggregate Demand

2.2.3Shape of the Aggregate Demand Curve

2.2.4Shifts in Aggregate Demand

2.2.5IB Multiple Choice - Aggregate Demand

2.2.6Short & Long-Run Aggregate Supply

2.2.7Alternative Models of LRAS

2.2.8Equilibrium in the AD-AS Model

2.2.9Output Gaps & the AD-AS Model

2.3Macroeconomic Objectives

2.3.1Introduction to Unemployment

2.3.2Limitations of Unemployment

2.3.3Types of Unemployment

2.3.4Causes & Impact of Unemployment

2.3.5Defining Inflation

2.3.6Measuring Inflation

2.3.7Use of Index Numbers

2.3.8The Consumer Price Index

2.3.9Consequences of Inflation

2.3.10Causes of Inflation

2.3.11Inflation & Unemployment Tradeoff

2.3.12The Short-Run Phillips Curve

2.3.13The Long-Run Phillips Curve

2.4Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth

2.4.2Determinants of Productivity

2.4.3Economic Growth & Productivity

2.4.4Absolute & Relative Poverty

2.4.5Inequality

2.4.6Inequality 2

2.4.7Lorenz Curve

2.4.8Government Policy on Poverty

2.4.9End of Topic Test - Poverty & Inequality

2.4.10Application - Inequality & Poverty

2.5Fiscal Policy

2.5.1Introduction to Fiscal Policy

2.5.2Fiscal Policy and AD-AS Model

2.5.3Fiscal Policy Lags

2.5.4Automatic Stabilizers

2.5.5IB Multiple Choice - Fiscal Policy

2.6Monetary Policy

2.6.1Objectives of Monetary Policy

2.6.2Monetary Policy Implementation

2.6.3Monetary Policy & AD-AS Model

2.6.4Monetary Policy Lags & Pitfalls

2.7Supply-Side Policies

2.7.1Supply-Side Policies

2.7.2Supply-Side Policies 2

3The Global Economy

3.1International Trade

3.1.1Globalisation

3.1.2Globalisation for LEDCs

3.1.3Globalisation for MEDCs

3.1.4Comparative Advantage & Trade

3.1.5Protectionism

3.1.6Arguments for Protectionism

3.1.7Arguments Against Protectionism

3.1.8End of Topic Test - Globalisation & Trade

3.1.9Case Study - Globalisation & Trade

3.2Exchange Rates

3.2.1Floating Exchange Rates

3.2.2Fixed Exchange Rate

3.2.3Effect of a Stronger & Weaker Dollar

3.3The Balance of Payments

3.3.1Balance of Payments

3.3.2Balance of Payments 2

3.3.3FDI & Reducing a BoP Deficit

3.4Economic Integration

3.4.1Customs Unions & WTO

3.4.2Merged Currency

3.5Terms of Trade

3.5.1Absolute & Comparative Advantage

3.5.2Gains from Trade

3.5.3Terms of Trade

3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6Economic Development

3.6.1Factors Influencing Growth & Development

3.6.2International Institutions

3.6.3Measures of Development

3.6.4Barriers to Development

3.6.5Case Study - The Bottom Billion

3.6.6End of Topic Test - Emerging & Developing

3.7The Role of Domestic & International Factors

3.7.1Interventionist Strategies

3.7.2Development Strategies

3.7.3Development Promotion Policies

3.7.4End of Topic Test - Growth & Global Development

3.7.5Application Questions -Growth & Global Development

3.8The Role of International Trade

3.8.1International Institutions

3.8.2End of Topic Test - Globalisation & Trade

3.9The Role of Foreign Aid

3.9.1Aid

3.9.2Limitations of Aid

3.9.3Support for Aid

3.9.4Application Questions - Developing Countries

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